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Starting earlier this year, many U.S.-based businesses must report information to the Financial Crimes Enforcement Network (FinCEN) about who owns or controls their company — a requirement outlined in the Corporate Transparency Act (CTA) enacted by Congress in 2021 to prevent illegal activities by anonymously-owned entities.
This presents a fundamental shift in the way U.S.-based businesses will operate. Deadlines for reporting vary based on the business’ date of establishment, and non-compliance will result in hefty fines.
How can business owners prepare for this seismic change? They’ll need to understand what a beneficial owner is; what types of companies are required to report; what needs to be reported; how to prepare to report; and penalties of non-compliance.
What’s a beneficial owner?
A beneficial owner is an individual who exercises substantial control over the reporting company, one or more intermediary entities or owns or controls at least 25% of the reporting company’s ownership interests.
An individual who falls into any of the following categories is exercising substantial control:
- They’re a senior officer within the C-suite; or serve as company president or general counsel;
- They are authorized to appoint or remove senior officers or a majority of directors of the reporting company;
- They’re important decision-makers for the reporting company;
- They have any other form of substantial control exercised in new or unique ways, for example through flexible corporate structures that give other methods of control than the ones listed above.
Related: The 5-Step Guide to Navigating Legal and Regulatory Changes in Business
Who must report and who does not
Next, it’s important to understand what kind of businesses are required to report their beneficial ownership:
Alternatively, there are 23 types of entities exempt from reporting requirements; they include publicly traded companies, nonprofits and certain large operating companies. There is also an inactive company exemption.
Preparing to report
Once a business owner understands that they have to report their beneficial ownership information to FinCEN, there are several pieces of information to get in order.
Business analysis
First, they have to start analyzing their cap table, management structure and contractual obligations. Because FinCEN defines “beneficial owners” as those individuals who own or control at least 25% of the ownership interests of an entity and those who have “substantial control” over an entity, determining who the beneficial owners are is not an easy, straightforward analysis. That is why, in addition to the cap table, it’s important to look at the company’s management structure and contractual obligations to see who has ultimate control of the business.
Next, gather names, addresses and passport/driver’s license information for each beneficial owner or get their FinCEN Identifiers for reporting purposes.
Put processes in place
Make sure everyone is aware that any changes to the beneficial owners needs to be reported to FinCEN within 30 days. So, if the company adds a major shareholder; appoints a new senior officer; has a new director; or enters into a voting contract, management should be made aware that an update to the entity’s BOI report must be made with FinCEN within 30 days.
Since this is not part of a company’s standard operating procedure, it will take some learning to remember that this must be completed.
What must be reported?
There are two sets of information necessary for the reporting process.
First, a reporting company has to report:
- Its legal name;
- Trade names, d/b/a or t/a names;
- The address of its primary office;
- Its jurisdiction of formation or registration; and
- Its Taxpayer Identification Number
The other set of information focuses on the beneficial owners. Reporting must include the following:
- The individual’s name;
- Date of birth;
- Residential address; and
- An identifying number from an acceptable identification document, like a passport or U.S. driver’s license.
Reporting deadlines and penalties
Reports are accepted as of Jan. 1, 2024. If the company was created or registered prior to Jan. 1, 2024, it has until Jan. 1, 2025 to report company and beneficial ownership information.
If the company was created or registered on or after Jan. 1, 2024, it must report beneficial ownership information — including about itself, its beneficial owners and company applicants (i.e. filers or those who control the filing of the initial registration) — within 90 calendar days of the effective registration date.
Finally, any updates or corrections to beneficial ownership information previously filed with FinCEN must be submitted within 30 days. Updates must be filed for each reporting company and each reportable beneficial owner after any change, like address changes or a new passport or driver’s license number, previously submitted to FinCEN.
Failure to file can lead to civil penalties of up to $500 a day, criminal penalties of up to two years imprisonment and a fine of up to $10,000.
The bottom line
The Corporate Transparency Act will take business owners some getting used to. However, it’s an important piece of legislation for them to understand so they may meet the requirements by filing the proper information within the appropriate window of time.